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Ask a Fool: What Is the PEG Ratio?

In the spirit of better investing and in celebration of the first Worldwide Invest Better Day coming up on Sept. 25, Motley Fool analysts will be answering user- and reader-submitted questions leading up to the big event. "Ask a Fool" anything, and we'll do our best to help you invest better.

The PEG ratio is based on earnings and growth estimates, both of which can be misleading or hard to predict. However, like most sweeping metrics, it's directionally accurate and can be a great springboard for discovering growth companies. In the following video, Fool.com analyst Austin Smith explains the ins and outs of interpreting a PEG ratio and then zeroes in on a few companies' ratios for closer examination.

For instance, General Electric's (NYSE: GE) PEG ratio is currently at 1.04, and it also has a great dividend. So, here's a company that's fairly valued to growth, and you get a bit of a passive income stream from it as well -- meaning that at this moment, GE could be a great buy. One important thing to remember is that the PEG ratio doesn't account for dividends, which can make up a huge part of an investor's return. Check out the video to learn more about this often-misunderstood metric.

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